Thursday, July 07, 2011

Since the Status Quo is unsustainable, there will be a Great Reset. The timing and nature of that Reset is up to us.

Yesterday I laid out why the Status Quo is financially unsustainable in The Promises That Cannot Be Kept. The unavoidable consequence of that is the the nation will experience a Great Reset in which the promises of the Savior State are relinquished, either voluntarily or involuntarily.

The Great Reset will thus be a great shock to everyone who has grown dependent on Big Government and global Corporate America.

An unprecedented array of interconnected trends are converging that will force a Reset not just in the economy but in the American society and culture.

1. Peak Government and Moral Hazard. When the Savior State promises to "fix" any and all problems in the nation, such as banks making bad bets and becoming insolvent, it introduces a pervasive moral hazard into the culture. The defining characteristic of moral hazard is that it insulates a person from risk. That person will behave much differently than someone who is not insulated from risk.

In the case of finance, the person insulated from the consequences of his gambles will have an insatiable appetite for risky bets that would be viewed as insanely foolhardy by a person exposed to the full, real risk.

In broad brush, the financial crisis was caused by the Savior State backstopping all "too big to fail" banks and Wall Street bets. These financial institutions are essentially free to make stupendously risky bets and keep the gains, if any, while passing the losses back to the Savior State's taxpayers. Imagine being given a stake at the roulette table where you get to keep your winnings but Uncle Sam makes good your losses.

Closer to home, the Savior State's promises to fund our retirement and healthcare via modest payroll deductions has introduced a moral hazard that is reflected in the nation's anemic savings rate: there is no need to save, because the heavy lifting of our retirement and healthcare will be done by the Savior State.

The numbers are something like this: the average Medicare recipient pays in $10,000 and extracts $250,000 in benefits. This kind of system is only sustainable if there are 25 workers for every retiree. Right now, there are roughly 2.5 workers for every retiree in the U.S., and if you consider only private-sector workers, it's more like 2 to 1.

We are at Peak Government and Peak Promises.

2. Demographics. "Pay as you go" systems like Social Security and Medicare only function sustainably if the retirees drawing benefits remain about 1/10th of the number of workers paying the taxes. Alternatively, the population must pyramid up every generation to maintain that 10-to-1 ratio.

The Baby Boom is roughly 76 million people, or about 25% of the population. There are about 139 million workers and about 310 million residents. The Baby Boom has started retiring en masse; all of my relatives and friends who work for state or local government are already retired well before the age of 60, and the first Boomers qualify for Medicare this year.

Once the Boomers are in the system, the worker-retiree ratio will be less than 2-to-1. This is completely unsustainable in a "pay as you go" system. Here are the charts:

3. The End of Work. The cheerleaders will claim the U.S. economy will generate 50 million new jobs in the next 20 years and thus stave off demographic collapse of entitlements, but there is scant evidence to support this claim and plentiful evidence to suggest we are also at Peak Employment in terms of civlian participation in the workforce.

As expected, developing nations like Egypt and Asian nations with low-fat, low protein cuisines like Japan have few obese adults. The surprise is that European nations with high-fat diets rich in chocolate and cheeses like France are relatively low. (Switzerland, though not shown, was just above Japan despite a very high per capita intake of chocolate.)

This suggests that fat alone (or sweets alone) cannot be singled out as the "cause" of obesity.

Now please don't take this entry personally if you are overweight. By the NIH standards of what constitutes "normal weight," some 2/3 of American adults are overweight or obese. Since this wasn't the case 40 years ago, we have to ask what's different now.

Here is a long-term study which supports the connection between lowering salt intake and lowering the risk of heart disease:Scientists prove that salty diet costs lives; "Eating less salt reduces the chances of suffering a heart attack or stroke, the first long-term study of salt’s impact on health confirms today."

The usual image of a high-salt diet is someone shaking loads of salt on their steak or veggies. Too bad it's not this simple. A careful study of standard American manufactured foods has led me to conclude that even if you don't add a single grain of salt to a single morsel of food, you are eating far more salt than is healthy.

The "recommended salt intake per day" is about 2300 mg (milligrams), which in terms of limiting your risk of dying prematurely should be viewed as a maximum best avoided--about half that would be a better target. So let's "eat healthy"--low fat and low sugar--and see how we do:

Total salt content of "low calorie, restricted fat" diet: 3660 mg. What can we say about this level of salt intake? It raises the risk of stroke and heart disease. Put simply: it will very likely take years off your life.

So next time you're in a fast food outlet or a supermarket, try to find something you can eat that won't kill you. It will be a challenge, I guarantee you.

Here's a short list of what I no longer eat:

chips: out, too much salt

fries: out, too much salt

sausage: out, too much salt

fast food in general: out, too much salt

salted nuts: out, too much salt

canned goods: out, too much salt

most cereals: out, too much salt

bottled salad dressings: out, too much salt

sports drinks: out, too much salt

pre-packaged salads: out, too much salt in the dressing

frozen meals: out, too much salt

packaged snacks: out, too much salt

packaged noodles: out, too much salt

In other words, literally everything in the supermarket except the fresh produce and the meat counter (with rare exceptions like frozen blueberries, which are essentially produce anyway).

If you want to locate the cause of American obesity and poor health, look no further than the label on virtually every item in the American supermarket.

Demographically, the Savior State programs of healthcare are unsustainable, even as the costs of treating chronic lifestyle diseases with expensive medications is skyrocketing along with the population at risk of these chronic lifestyle diseases.

5. Peak Cheap Oil. Cheerleaders assure us the world has 40 years of oil, no problem, but these cheerleaders inevitably avoid the consequences of EROEI. It now takes more capital to extract a barrel of oil or process shale into liquid oil, a dynamic measured by EROEI, energy returned on energy invested (or EROI, energy returned on investment, which to the degree that money is a measure of energy is the same thing).

In the good old days, oil gushed out of the ground and the total recovery cost was $1 per barrel, or perhaps $5 if the well was deep. So what happens as the recovery cost rises to $50 per barrel? That is the cost for deep offshore wells, tar sands, shale oil and all the other so-called "unconventional" sources of oil.

We should recall here that relatively modest (in the long view) increases in the cost of energy in the 1970s sent the U.S. economy into a decade-long stagflation. Cheerleaders reassure us that energy is a much smaller part of the economy now, but that reassurance is hollow, for oil leverages everything from air travel to plastics to fertilizer to the cheap frozen foods in the supermarket.

Bottom line, more of our national income will be diverted to pay for higher energy costs, leaving less discretionary income for the consumer society that has become the foundation of the economy. As the Savior State promises are revealed as impossible, then people will respond by saving more as they are exposed to the real-world risks of having no savings. This will leave less discretionary income for consumption.

The Great Reset won't just transform government, it will transform the economy and culture. Although it will be marketed as a great tragedy by those losing power and profits, the end of Savior State moral hazard will not be a tragedy, it will simply be a return to reality. Those exposed to risk behave differently than those insulated from risk. That is neither "good" nor "bad," it is an observation any of us can make.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

Our Privacy Policy:

Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Adsense and Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative)If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.

Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted

Weekly Musings Reports

"What makes you a channel worth paying for? It's actually pretty simple - you possess a clarity of thought that most of us can only dream of, and a perspective that allows you to focus on the truth with laser-like precision." Jim S.

The "unsubscribe" link is for when you find the usual drivel here insufferable.

Contribute via PayPal

Why I gratefully accept donations and why you might want to donate:

A 95-minute movie with 10 minutes of ads and a small popcorn costs $25.
If you enjoyed this site for at least 2 hours this year, and you donate $25, you already received more entertainment than you did from the movie. The other 100+ hours of enjoyment you receive here is FREE.

Subscribers and donors of $50 or more this year will receive exclusive weekly Musings Reports.

You have the immense moral satisfaction of aiding a poor dumb writer who seeks to inform, entertain and amuse you.